Aditya Birla Fashion & Retail Ltd
India’s Premier Fashion House
August, 2016
Kshitij Kaji
Research Analyst
+91 (22) 4272 2515
[email protected]
Edel Invest Research
BUY
Coverage Stocks: Aditya Birla Fashion & Retail Ltd.
India’s Premier Fashion House
CMP: 165
Kshitij Kaji
Research Analyst
+91 (22) 4272 2515
[email protected]
Target Price: 215
Aditya Birla Fashion & Retail (ABFRL)—formed by merger of Madura and Pantaloons Fashion & Retail
(Pantaloons)—is India’s largest branded apparels player with a turnover of INR 6,060 crore in FY16. Ability to
surpass industry growth anchored by a large base, anticipated margin improvement from Pantaloons’
turnaround, an asset light model, presence across all categories & price points in apparel and a massive
unparalleled distribution network reinforce our optimism in the company’s robust growth prospects. Moreover,
it is best poised, underpinned by sheer quality & size of Madura's 4 brands and presence in fastest growing
segments such as fast fashion through Pantaloons & Forever 21, amongst branded apparel players to take
advantage of the improving macroeconomic milieu. Improving financial metrics—robust free cash flow
generation, 39% EBITDA CAGR over FY16-18E and 20% RoCE by FY19E (4% currently)—are expected to sustain
for many years, rendering the company a potential multi-bagger. We initiate with ‘BUY’ with a TP of INR 215.
Bloomberg:
ABFRL:IN
52-week range (INR):
263 / 123
Share in issue (Cr):
77.2
M cap (INR Cr):
12,674
Avg. Daily Vol. BSE/NSE :(‘000):
300/800
SHARE HOLDING PATTERN (%)
(in %)
Jun-16
Promoter
59.46
Public
40.54
Others
–
Presence across value pyramid, diversified market channels, pan-India presence burnish prospects
Madura is predominantly a premium men’s wear player, housing India’s largest brands (Louis Philippe, Van
Heusen, Allen Solly and Peter England) with 2.3 mn sq ft retail space and revenue of ~INR 4,000 crore in FY16.
Acquisition of retail franchisees such as Pantaloons and Forever 21 gives it access to mid-premium fast fashion for
women across additional 2.5 mn sq ft. Cumulatively, Madura and Pantaloons boast of a portfolio of 40 brands,
retailed through 2,150 EBOs and additional 7,000 points of sale across India with a combined 5.4 mn sq ft area. We
perceive wide offerings across price points (mass to luxury), broad categories (men’s wear, women’s wear, kid’s
wear, accessories) and diversified market channels (MBOs, EBOs, LRS) to be key catalysts of ABFRL’s success.
Pantaloons long-term game changer; expansion in white spaces, deeper penetration to spur Madura
Pantaloons’ aggressive expansion plans are bound to spur ABFRL’s top line as new stores in cities sans branded
apparel presence provide humungous growth opportunity. Also, targeting the currently fragmented women’s wear
segment and the fast growing fast fashion segment entails significant long-term benefits. Moreover, higher sales
throughput in each store along with improved designs, new vendor network, refurbished IT systems and addition
& rationalization of own brands should meaningfully spur its margins. Successful franchisee model in conjunction
with economies of scale will aid superior return ratios. Madura is anticipated to far outstrip industry growth
underpinned by expansion in white spaces, product extensions through its wide distribution network.
Improving macros, rising brand consciousness entail humungous growth opportunity
Domestic branded apparel segment is set to catapult manifold riding: 1) shift from fabrics to readymade garments;
2) favourable demographics; 3) higher discretionary spends; 4) low GDP per capita spend on apparel; 5) increasing
spends on branded products due to growing fashion consciousness & aspirations, among others. Sales of branded
apparels are estimated to grow at 15-20% CAGR over FY16-19E, driven by volumes as well as superior realizations.
Therefore, the share of branded garments is expected to rise to 48-50% in FY19E compared to ~35% in FY14.
Outlook and valuations: Burnished prospects; initiate with ‘BUY’
We believe ABFRL is best placed among branded apparel peers to reap significant benefits of the improving
macroeconomic milieu due to the sheer quality & size of Madura's 4 brands, presence in fastest growing segments
such as fast fashion and an unparalleled distribution network. The company’s pole position, ability to generate free
cash flow, 39% EBITDA CAGR over FY16-18E and RoCE expansion from 4% currently to 20% by FY19E will yield
target multiple of 3x sales for Madura and 15x EV/EBITDA for Pantaloons, leading to a target price of INR 215.
220
200
180
160
140
120
100
80
60
40
Year to March (INR Cr)
Net revenues
Rev growth (%)
EBITDA ma rgi n (%)
FY14
1,661
29%
2.8
FY15
1,851
11%
4.7
FY16
6,060
NA
6.6
FY17E
6,911
14%
8.8
FY18E
8,069
17%
9.5
(187)
(228)
(104)
179
319
(4)
NA
(5)
NA
(1)
NA
2
NA
4
78%
P/E (x)
P/B (x)
RoACE (%)
RoAE (%)
NA
13.2
NA
NA
NA
22.2
NA
NA
NA
13.5
3
NA
71.0
11.4
13
17
40.0
8.8
18
25
EV/EBITDA (x)
193
102.5
36.6
23.9
19.0
Adjus ted PAT
Jul-16
May-16
Jan-16
ABFRL
Mar-16
Nov-15
Jul-15
Sep-15
May-15
Jan-15
Mar-15
Adj. EPS (INR)
EPS growth (%)
Sensex
nd
Date: 22 August 2016
1
*Numbers up to FY15 are standalone Pantaloons numbers. Numbers post FY16 are Madura + Pantaloons
**As there is no Annual Report of ABFRL, all the numbers are based on proforma Financial Statements
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
ABFRL: Sales Growth + Margin Improvement + Improving Return Ratios
ABFRL is best poised, underpinned by sheer quality & size of Madura's 4 brands and presence in fastest
growing segments such as fast fashion through Pantaloons & Forever 21, amongst branded apparel
players to take advantage of the improving macroeconomic milieu. Improving financial metrics—robust
free cash flow generation, 39% EBITDA CAGR over FY16-18E and 20% RoCE by FY19E (4% currently)—
are expected to sustain for many years, rendering the company a potential multi-bagger
Wide offerings across price
points (mass to luxury), broad
categories (men’s wear,
women’s wear, kid’s wear,
accessories) and diversified
market channels (MBOs, EBOs,
LRS) to be key catalysts of
ABFRL’s success.
Pantaloons’ aggressive
expansion plans in cities sans
branded apparel presence,
targeting the currently
fragmented women’s wear
segment and the fast growing
fast fashion segment entails
significant long-term benefits.
FY16
FY17E
FY18E
FY19E
Revenue
6060
6911
8069
9483
EBITDA
397
608
767
948
EBITDA
Margin
7%
9%
10%
10%
PAT
-104
179
319
476
FY16
RoACE (%)
3%
FY17E
13%
FY18E
18%
Improving macros, rising brand
consciousness entail
humungous growth
opportunity. The share of
branded garments is expected
to rise to 48-50% in FY19E
compared to ~35% in FY14.
Multiple
FY19E
21%
Madura
Pantaloons
Debt to
Equity (x)
2.0
1.7
1.2
Price Target
3x Market Cap to Sales
215
13x EV/EBITDA
0.8
EBITDA CAGR of 39%
to lead to blended
exit multiple of 24x
FY18E EV/EBITDA
Entry = INR 165
Total
Return of
32%
2
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Focus Charts
ABFRL Portfolio mix – FY16
Presence across all segments
Luxury
Men's Casuals
5% 4%
Men's Formals
8%
Super-Premium
Women's Western
wear
39%
12%
Premium
Women's Ethnic
wear
Kids
Sub-premium
32%
Accessories
Value
Mass
Expected size of ABFRL brands by FY20E
ABFRL has a massive retail presence
4500
5000
2500
4000
1500-2000 cr each
3000
5.5
4.8
2000
5
4.2
3.6
2000
500
1000
1.6
150
50
50
Simon Carter
Hackett
The Collective
People
Forever 21
Allen Solly
Van Heusen
Peter England
Louis Philippe
3
1.3
1000
0
Pantaloons
4
1500
1000
6
2
500
895
1129
1367
1648
1865
2200
FY11
FY12
FY13
FY14
FY15
FY16
0
1
0
Size (INR Cr) - FY20E
EBOS (LFS)
Carpet Area (mn Sq ft) (RHS)
*2011 and 2012 is only Madura. 2013 onwards includes Pantaloons
Expect robust topline growth alongwith margin increase
10000
10.0%
9.5%
9000
11.0%
10.0%
25%
8.8%
8000
Return ratios to improve
9.0%
7000
13%
8.0%
6000
4000
7.0%
6.6%
5000
6.0%
6060
6911
8069
9483
FY16
FY17E
FY18E
FY19E
3000
18%
17%
28%
21%
3%
FY16
FY17E
FY18E
FY19E
5.0%
Revenue (INR Cr)
EBITDA Margin(%)
-16%
ROCE (%)
ROE (%)
Source: Company, Edel Invest Research
3
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Embarking on growth phase after gradually building a fashion house
Entry Phase
Establish presence
Expansion Phase
Growth Phase
Fill gaps in offering
Economies of scale
2017 onwards - Consolidate apparel business
under one umbrella with product portfolio
across all categories. Next leg to focus on
growth
1999 - Takeover of Madura
2007 - Launch of "The Collective" (super
premium) and "The People"(mass)
2004 - Transition from wholesale to retail
2013 - JV with Hackett
2006 - Rapid expansion of Madura brands
(4 premium menswear brands)
2013 & 2016 - Acquisition of PFRL & Forever 21
(fast fashion and women's wear retailers)
Source: Company, Edel Invest Research.
ABFRL is present across all segments of the USD 10 bn Indian branded apparel market with 10% market share
Segment
Luxury and Super
Premium
Premium and Mid
Premium
Value & Mass
Total
Men
Women
Market Size
(USD bn)
Casual
Formal
Western
Ethnic
0.44
0.01
0.22
0.04
4.54
0.71
1.58
0.33
Kids
Accessories
0.04
0.13
0.01
0.46
1.36
0.11
5.21
0.64
1.77
0.37
1.16
1.18
0.08
10.19
1.36
3.57
0.74
1.66
2.67
0.21
Source: Company, Edel Invest Research.
ABFRL accounts for 10% (USD 1 bn) of India’s branded apparel market (USD 10 bn)
ABFRL FY16
revenues
(USD bn), 1
Indian Branded
Apparel Size
(USD bn), 9
Source: Company, Edel Invest Research.
4
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
ABFRL has steadily added brands to its kitty aiding its presence across all price categories and product segments
Portfolio mix – FY16
Expected size of brands by FY20E
50
50
Simon Carter
150
Hackett
Accessories
500
The Collective
Kids
32%
1000
People
Women's Ethnic
wear
Forever 21
12%
Allen Solly
Women's Western
wear
Van Heusen
39%
1500-2000 cr each
Peter England
8%
4500
Louis Philippe
Men's Formals
4%
(INR Cr)
5%
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Pantaloons
Men's Casuals
Size (INR Cr) - FY20E
Source: Company, Edel Invest Research
ABFRL Brand positioning – Madura Brands present across every price point with Pantaloons as a Fast Fashion Value Retailer
Segment
Brand
Positioning
Louis Philippe
Van Heusen
Allen Solly
Peter England
The Collective
People
Forever 21
Simon Carter
Hackett
Pantaloons
Premium
Premium
Mid-premium
Value
Super Premium
Value
Value
Super Premium
Super Premium
Value
Formal wear brand with superior quality and craftsmanship
Lifestyle brand encouraging trendy power dressing
Friday dressing brand promoting casual, semi formal wear through colors
Formal and casual brand with strong presence in denim
Transition from multi brand super premium to premium and bridge to luxury
Recently launched mass brand set for expansion mode
Mid Premium Fast Fashion womens wear retail brand
Formal and casual menswear brand with big variety of accessories
Formal and casual menswear brand
Fast Fashion retailer with higher focus on womens wear
Revenue breakup between Madura and Pantaloon (FY17E)
Madura
Pantaloons
EBITDA breakup between Madura and Pantaloon (FY17E)
Pantaloons
25%
Pantaloons
36%
Madura
64%
Madura
75%
Source: Company, Edel Invest Research
5
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
ABFRL: Boasts of largest distribution reach among apparel players
ABFRL’s 5.4 mn sq ft retail space is currently split almost evenly between Madura and Pantaloon. While
Madura’s 4— Louis Philippe, Allen Solly, Peter England and Van Heusen—brands are present across 2,000
EBOs, 4,000 MBOs and 3,000 department stores, Pantaloon has 135 stores and is planning to add 30 -35 new
stores every year.
ABFRL has a massive retail presence
2500
5.5
2000
4.2
4.8
5
3.6
4
1500
1.6
1000
6
3
1.3
2
500
895
1129
1367
1648
1865
2200
FY11
FY12
FY13
FY14
FY15
FY16
0
1
0
EBOS (LFS)
Carpet Area (mn Sq ft) (RHS)
*2011 and 2012 is only Madura EBOs. 2013 onwards includes Pantaloons
Source: CRISIL, Company, Edel Invest Research.
ABFRL EBOs present across pan-India
Source: Company, Edel Invest Research
6
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
ABFRL to benefit from underpenetrated segments (casualwear, womenswear)/ distribution channels (ecommerce, omni-channel) and adaptability to major trends:
Major Trends
ABFRL Presence
Changing trends and preferences

Readymade garments replacing demand for
fabrics/stitched clothes

Preference for western and casual wear
combined with preference for brands with
western positioning

Madura has launched sub-brands in white spaces
such as LP watches, Solly kids, LP shoes
Higher demand for accessories/white
spaces/product extensions
Fast fashion women’s wear

Women’s wear market is mostly fragmented and
unorganized

Diminishing dominance of ethnic wear due to
shift to casual wear and formal wear for women
as more women join the workforce

All Madura brands have a western positioning
and have gradually moved away from formal
menswear brands by launching casual wear subbrands
Preference for fast fashion (latest designs
available at cheap prices – products have shorter
shelf life and product life with high turnover)
E-Commerce

Presence across e-commerce apparel portals

Omni-channel distribution to provide seamless
transition between e-commerce and brick and
mortar players
Allen Solly and Van Heusen have launched
women’s wear sub-brands in the premium
category
Pantaloons to focus primarily on being a fast
fashion women’s wear player in the value
segment
Recent Forever 21 acquisition in the fast fashion
mid premium category
ABFRL has its own e-commerce portal Trend-In
which currently contributes 4-5% to total
revenue. It is also present across major ecommerce platforms
Omni-channel distribution to roll out later this
year
Source: Company, Edel Invest Research.
7
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Madura: Creator and owner of India’s biggest brands
Creator of India’s biggest brands
While in India there is no single brand bigger than INR 500 crore, Madura has managed to create 4 such
brands. Moreover, the 4 brands combined render Madura 2.5x bigger than its closest competitor Arvind.
Madura’s brands are far bigger than any of the other brands in India
Madura - 4000 cr
1200
1000
Raymond - 1150 Cr
600
KKCL - 450 Cr
Arvind - 1600 Cr
Indian Terrain
350 Cr
400
200
Tommy
Hilfiger
Flying Machine
USPA
Arrow
Parx
Color Plus
Raymond
Park Avenue
Indian Terrain
Lawman
Integriti
Killer
Peter England
Allen Solly
Van Heusen
0
Louis Philippe
(INR Cr)
800
Source: Company, Edel Invest Research
Total brand ownership unlike peers
Aditya Birla Nuvo acquired Madura Fashion & Lifestyle (established as Madura Coats in 1988) from Coats
Viyella (Europe’s largest clothing supplier) in 1999 and became the owner of Louis Philippe, Allen Solly and
Peter England. Van Heusen, however, is not owned by Madura, though it holds exclusive rights for the brand
in India, Middle East and SAARC.
Benefits of owning Louis Philippe, Allen Solly and Peter England
Save royalty
expenses and
other JV
related
overhangs
Freedom in
designing,
distribution
Flexibility in
expansion of the
brand as continuous
investments in
brands is possible
Source: Company, Edel Invest Research
8
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Diversifying into other categories
Though predominantly a premium men’s wear brand, Madura gradually shifted away from its primary line of
formal men’s wear into other categories such as casual wear, women’s wear and accessories due to limited
competition and faster growth in latter categories.
Reducing share of premium menswear is a positive due to faster growth in other segments
72%
55%
16%
4%
Mainline
5%
3%
Sports
Women
2010
7%
7%
Jeans
14%
17%
Luxury/Elite
2015
Source: Company, Edel Invest Research.
Continuous brand evolution via brand extension/sub-brands to spur growth
This extension and sub-branding has already been successful—Louis Philippe shoes clocked revenue of INR
150 crore (with its own EBOs), Louis Philippe Jeans hit INR 100 crore revenue, womens wear posted INR 250
crore (predominantly through Van Heusen) and kid’s wear registered INR 150 crore (predominantly through
Allen Solly). Peter England sells the highest number of denims in India by volume.
Brand
Core
Brand Extensions
Formal Wear (Men)
Casual Wear, Colored Jeans and other denims,
Luggage
Formal Wear (Men)
Casual Wear, Women’s wear
Formal Wear (Men)
Casual Wear, Women’s wear, Friday wear, Shoes, Kids
Wear
Formal Wear (Men)
Casual Wear, Shoes, Bags, Jeans, Belts
Source: Company, Edel Invest Research.
New brands in kitty
Simon Cater: Super premium brand to add to The Collective and Hackett
Simon Cater is a men’s wear London brand known for apparel and accessories such as watches, cuff links,
jewellery and luggage. ABFRL has inked a long-term licensing arrangement with rights to design &
manufacture. However, this is expected to be a small brand for ABFRL going forward.
Forever 21: One of the best global fast fashion retail brands
Forever 21 is an American fast fashion retailer chain known for its trendy offerings of women’s, men’s and
girls’ clothing, accessories and its economical pricing. It is present across America, Asia, Middle East and UK.
Women’s fast fashion is the fastest growing segment globally and in India, which prompted ABFRL to join
hands with Forever 21 as it further entrenches the former’s leadership position in the women’s fast fashion
business in India. ABFRL has acquired Forever 21’s online and offline rights for the Indian market and the
existing store network (12) from Diana Retail and DLF Brands for INR 175 crore. Forever 21 reported revenue
of INR 262 crore in FY16 (INR 105 crore and INR 213 crore revenue in FY14 and FY15, respectively) and ABFRL
plans to scale it up aggressively and is targeting revenue of INR 1,000 crore by FY20E.
9
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Multi-channel, asset light distribution strategy: Success lynchpin
As oganised retail has evolved in India, branded players have adopted a multi-channel distribution strategy
through various retail formats like multi-brand outlets (MBOs), large format stores (LFS)/ SIS (shop in shop)
and exclusive brand outlets (EBOs). These distribution channels and explosion in the number of retail outlets
provide branded apparel players plenty of options to reach out to consumers in a cost-effective way. Madura
has a distribution network comprising ~1,900 stores, covering 2.7 mn sq ft retail space. It is also present in
more than 4,000 premium MBOs and 3,000 departmental stores. The company’s swtich from a wholesale
distribution network to retail has helped spur growth as share of EBOs and LFS has catapulted to 49% and
14% in FY16 from 40% and 8% in FY10, at the expense of MBOs.
Madura has penetrated each distribution channel
Madura’s revenue channel mix has shifted from wholesale to retail
3896
Others, 17%
2904
EBOs, 49%
1945
1850
LFS, 14%
698
440
MBOs
FY 10 (number of stores)
SIS
EBOs
Trade
(MBOs), 20%
FY 15 (number of stores)
Source: Company, Edel Invest Research.
Madura has been one of the most successful branded apparel companies anchored by its unwavering focus
on retail and department stores spearheaded by a “reach and penetration” strategy. Its retail network is far
superior to any of its competitors.
Madura has the largest distribution network
1875
950
230
Madura
Arvind
Raymond
315
125
KKCL
Indian Terrain
Number of EBOs
Source: Company, Edel Invest Research
10
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Although bulk of the current EBOs are company owned (entailed heavy investment for brand building)...
Type of EBO
% of stores
COCO
30%
COFO
40%
FOFO
30%
Location
Bigger sized stores in metros and
prime locations
Tier 1 cities which have potential
but are under penetrated
Smaller towns and cities as lower
expertise in the local market
Capex
Inventory Risk
Lease and
operations
Madura
Madura
Madura
Madura
Madura
Franchisee Owner
Franchisee Owner
Madura
Franchisee Owner
Source: Company, Edel Invest Research
200 new EBOs to be opened yearly will be through the asset light franchisee route
Madura has a strong presence in South and West regions and Tier 1 and 2 cities of India. However they plan
to expand in the North and East and Tier 3 and Tier 4 cities in a phased expansion of 200 new EBOS yearly
with 85% of them being through the franchisee route. Also as 35% of the current EBOs are Peter England, it
gives Madura a chance to scale up the EBO presence of the other brands.
Finger on fashion pulse: Planet Fashion helps gauge brand demand in underpenetrated areas
Planet Fashion was launched in 2000 as a hybrid EBO-MBO experience housing all 4 brands under one roof.
Currently, Planet Fashion has a chain of 200 stores across 164 towns in India garnering INR 330 crore
revenues as of FY16. Madura is planning to increase the store count to 500 by 2018 and double its revenue
by penetrating further into Tier 3 and 4 towns. The company has launched Project Bharat wherein it will
penetrate 500 new towns through the Planet Fashion model by displaying all brands under one roof. EBOs in
these towns will be based on the response to individual brands.
Online platform: TrendIN set for metamorphosis
Currently, ABFRL sells online via its portal TrendIN and has direct supply agreements with other e-commerce
portals with a strict policy of limiting discounts to protect brands. Going forward, along with these ecommerce platforms, each brand will have its own website with TrendIN as a back-end portal to aid the
omni-channel experience. Currently, the company’s total online revenue is INR 200 crore, which is estimated
to jump to INR 1500 core by 2020 due to omni-channel and a 40% growth in e-commerce spending.
11
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
The omni-channel experience
The omni channel provides the consumer with choice and convenience which most apparel companies
believe are key to enrich consumer experience to create brand loyalty. It enables the consumer to decide
when, where and how to shop. The consumer can order anything from anywhere, at any time using any
device. The customer can also see where the product is available, different sizes, colors & designs of
products and how much time will it take to be delieved. Omni channel retail integrates multiple distribution
channels to provide a seamless experience to customers through all possible channels, providing variety and
value as they can:
 Buy online and pick up from a store or warehouse.
 Take trial in the store and get it delivered at home if the color or size is out of stock.
 Place an order on a mobile device and be assured that the item is not only available, but also be able to
choose how much to pay for shipping and know exactly when it will be delivered.
 Order online, have it delivered at home and return to the store or warehouse if it does not fit.
Source: Company, Edel Invest Research
Madura is planning annual ~INR 40 crore IT spends, which includes INR 25 crore capex and INR 15 crore
opex to build an omni-channel distribution platform. On the anvil is plan to launch the omni-channel
expereince in 100 stores soon with a target of 500 stores by FY17 end. Due to the size and scale of its 4
brands, omni-channel will benefit Madura the most due to benefits listed below.
Benefits of omni channel
Ensure better
conversions and asset
utilizations by curbing
sales lost due to limited
SKUs in a store
Big Data Analytics will
give good insights into
consumers’ buying
behaviour
Eases additional
distribution costs and
increases penetration.
Also creates synergies in
sourcing inventory and
retail space
Helps counter threat of
e-commerce platforms
by providing more choice
and a more fulfilling
experience
Source: Company, Edel Invest Research
12
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Strong brands portfolio, switch to retail: Key growth catalysts
Initially, Madura’s brands struggled to grow due to lower per capita spend on branded apparel & brand
conciousness among consumers and poor visibility of brands . However, with the mushrooming of malls and
organised retail, the company switched from sales through trade channels (MBOs) to sales via retail (EBOs
and LFS) in FY10. Post the switch, its brands began clocking a commendable ~20-25% CAGR on a much
higher base (refer chart below).
Switch from wholesale to retail resulted in huge growth for Madura brands
28% CAGR
(INR Cr)
3226
473
830
1026
1116
392
621
1251
FY04
FY05
FY06
FY07
FY08
FY09
FY10
1811
FY11
2239
2523
FY12
FY13
FY14
3735
4000
FY15
FY16
Madura Revenues (INR Cr)
Source: Company, Edel Invest Research.
FY16 margin miss to reverse: Strong brands, network and product extensions to yield 15% CAGR
FY16 revenue and margin were depressed due to many one offs—higher employee bonus expenses, merger
consolidation costs etc. Moreover, weak demand and competition from e-commerce led to heightened A&P
spends, which also weighed on margin. However, we expect demand to pick up going forward, especially as
e-commerce competition is waning (100% FDI in e-tail came with riders favoring brick-and-mortar players).
This growth will be complemented by a gradual increase in margin.
FY16 revenues and margin miss to reverse going ahead
7000
12%
6000
(INR Cr)
5000
8%
9%
12%
10%
10%
11%
11%
14%
12%
10%
10%
8%
4000
6%
3000
4%
2000
2%
1000
0%
0
-2%
FY10
FY11
FY12
FY13
FY14
Revenues (INR Cr)
FY15
FY16
FY17E
FY18E
FY19E
EBITDA Margin (%)
Source: Company, Edel Invest Research.
Best-in-class return ratios due to lowest working capital cycle and high asset turnover
Madura’s working capital cycle of ~30 days is the shortest in the industry. This is largely driven by extremely
favourable terms from vendors (due to long standing relationships and strong brands) and short receivables
days (only Madura sales to LFS are receivables). As 50% of the company’s manufacturing is outsourced and
distribution expansion is via the franchisee model, capex is low, leading to high asset turnover ratios and
best-in-class RoCE of 50% plus.
13
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Madura Stores
14
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Pantaloon Fashion and Retail (Pantaloon): Fast fashion retailer
Pantaloon was launched in 1997 by the Future Group and was acquired by Aditya Birla Nuvo in 2013. It has
seen several transitions, but its current format of a fast fashion retailer enables presence across the fastest
growing segment in branded apparel which will hold it in good stead.
Pantaloons to target 2 fastest growing segments—women’s wear (highly fragmented) and fast fashion
Launched as a
discount
apparel store in
1997
Later
positioned as a
family store in
mid 2000s
Currently a fast
fashion big box
retailer with
higher focus on
women's wear
Source: Company, Edel Invest Research
Pantaloons acquisition to plug gaps in Madura’s portfolio and distribution network
Pantaloon has positioned itself as an affordable fashion brand with a higher focus on women’s wear,
women’s accessories/non-apparel and kids wear (65% of current revenues are non menswear - opposite of
Madura). It is present on a pan-India with a big presence in tier 3 and tier 4 cities (uncluttered areas with
minimal brand presence). The biggest contribution of revenues comes from the East and North regions
which also account for the highest profitability due to low rental expenses (Madura has higher penetration
in the south and West regions).
Revenue mix titled towards women’s and kids wear
Presence in East and uncluttered areas accounts for higher profitability
35%
West, 31%
60% is womens wear and kids wear
North, 26%
23%
19%
14%
9%
South, 14%
Nonapparel
Kids
Women
Ethnic
Women
Western
Men
East, 29%
Source: Company, Edel Invest Research
15
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
ABFRL’s 4 step roadmap to revive Pantaloon
Post-acquisition by the Aditya Birla Group, significant investments were made focused on store upgradation,
expansion, deeper pan-India penetration, portfolio enrichment, brand building and organization processes
to lay the foundation for Pantaloon’s future growth.
Strategy set in FY14 is going according to plan
FY14
FY15
FY16
FY17
Manage the transition
Lay the foundation
Commence growth
journey
Build scale
Source: Company, Edel Invest Research.
The journey up to FY16 has been relatively successful, setting the base to build scale in FY17. It posted gross
margin jump of 3% plus and EBITDA margin of 6% plus in a few quarters, led by the following measures:
Issues
Implementation
Stores upkeep, renovation & expansion
Refurbishing the 30 most profitable Pantaloon stores, renewing rental leases at lower rates, adding
30 new stores yearly to its existing 104 stores annually with pilot franchisee model successful
Designs & Brands
Hired 40 new designers and set up a new in-house Design Studio to deliver 5,000+ designs every
season, add own new brands, increase number of seasons from 2 currently, optimized mix of
exclusive brands and margin renegotiation for external brands
Vendor network & supply chain
transformation
Replaced one-third of existing 250 vendors to improve quality & costs, will stick to outsourcing to be
asset light, 4 regional distribution centers created and to be operational soon
Investment in IT and people
Recruited ~280 at the Head Office level, rationalized business processes and KRAs for important
positions. Built IT & CRM systems which will be rolled out in all stores and warehouses
Source: Company, Edel Invest Research.
16
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Fast fashion, women's wear focus, presence in uncluttered areas to boost ABFRL topline; higher
throughput to aid margins
Higher sales throughput (more
sales from same stores) will aid
margins due to high fixed cost
nature of the business
Number of seasons increasing
from 2 to 6 along with attractive
pricing (fast fashion concept),
will result in higher growth
Pantaloons heavy presence in
the traditionally more profitable
womens wear segment will aid
margins
Presence in the East and Tier 3
and Tier 4 towns with minimal
branded apparel presence could
spur growth
New Pantaloons
strategy could be a
long term game
changer for ABFRL
Source: Company, Edel Invest Research.
Higher contribution of own brands (now 63% of revenues) to also aid margins
Initially Pantaloons generated 52% revenue from own brands. However after the rationalization of brands,
they generate 63% of their revenues from their own brands which should aid margins due to higher
realizations, lower royalty payments and higher control on the brands.
Categories
Own & In-Licensed brands
New Own & In-Licensed
brands
External brands
Bare Denim, JM Sport, RIG,
Byford, Alto Moda, SF Jeans
John Miller, Celio, Spykar,
Ajile, Lombard, F-Factor
Urban Eagle, Indus Route
Lee Cooper, Levi's
Honey, Bare Denim, RIG
Alto Moda, Candie's
109°F, AND
Anabelle, Ajile
Izabel, SF
Jealous 21, Kraus Jeans
Rangmanch, Trishaa,
Akkriti
Alto Moda, Jamini
Biba, W, Global Desi
Chalk, Bare Denim, Akkriti
Chirpie Pie, Poppers
Barbie, Gini & Jony
Men
Women –
Western
Women –
Ethnic
Kids
Source: Company, Edel Invest Research.
17
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Continuous aggressive expansion alongwith renewed strategy to yield a 20% plus CAGR growth
The last 3 years have seen Pantaloons store count doubling from 65 to 135 stores and nearly all of the
existing stores are new or renovated stores. Pantaloons plans to add 30-35 stores every year in new areas
(South India and new towns/cities).
Pantaloons has doubled store its count in the last 3 years
Pantaloons has a pan India presence
250
195
200
165
135
150
113
87
100
65
50
0
FY13
FY14
FY15
FY16
FY17E
FY18E
Pantaloons Stores
Source: Company, Edel Invest Research.
Higher throughput and scale will result in a margin uptick
Pantaloons margins have been suppressed over the last 3 years as half of the stores are new and typically it
takes 2-3 years for stores to mature. New store addition in terms of percentage growth is expected to be
slower and the higher ratio of mature stores will result in a margin improvement. Increasing throughput
(higher same store sales growth) will also aid in margins due to high fixed cost nature of the business.
Margins to gradually inch up towards 8-9%
3500
8.0%
2917
3000
2431
(INR Cr)
2500
2000
1500
1661
1851
7.0%
6.0%
2060
5.0%
4.0%
1285
3.0%
1000
2.0%
500
1.0%
0
0.0%
FY13
FY14
FY15
Revenue (INR Cr)
FY16
FY17E
FY18E
EBITDA Margins (%)
Source: Company, Edel Invest Research.
Franchisee store model to aid return ratios
After the success of the Pantaloons pilot franchisee store, they have opened 4 more stores through this
route. In this model, the company retains the long-term lease while the franchise infuses the capital. Stores
of 10,000-15,000 sq.ft. without any capex infusion should significantly boost return ratios.
18
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Indian branded apparel market estimated to clock 15-20% CAGR and anticipated to outpace domestic readymade garment market 1.5x
India’s GDP and GDP per capita to increase
India’s per capita spending on apparel (USD) currently ¼ of China
3,000
2,672 8.0%
2,500
7.5%
2,000
701
647
7.0%
1,522
119
52
2020E
2019E
5.0%
2018E
0
2017E
5.5%
2016E
500
2015
6.0%
2014
1,000
2013
6.5%
2012
1,500
2011
680 690
US
India GDP Per Capita (USD) (LHS)
EU
2005
Real GDP Growth (%) (RHS)
19 30
China
India
2010
Source: Company, Edel Invest Research
India’s average population age amongst the least
India to soon have one of the largest working populations
50%
44%
75%
34%
32%
31%
30%
21%
18%
65%
23%
55%
15%
9%
8%
35%
Japan
USA
China
Europe
India
Indonesia
45%
1950 1960 1970 1980 1990 2010 2020 2030 2040 2050
Non - Working Population (India)
Aged 24 and under
Aged 60+
Non - Working Population (China)
Source: Company, Edel Invest Research
India’s discretionary spending has been rising
India’s personal disposable income growing steadily
16%
3,045
14%
12%
10%
12%
12%
10%
1,939
6%
787
4%
424
2000-05
2005-10
Total consumer spend
Discretionary Consumer Spend
2010-15
2005
2010
2015
2020E
Essential Consumer Spend
India Disposable Personal Income (USD bn)
Source: Company, Edel Invest Research
19
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Rise in middle income and affluent class
Rising urban population
1%
7%
13%
41.2%
12%
20%
18%
35.0%
42%
32.0%
59%
86%
27.5%
75%
46%
20%
1995
2005
Low Income
2015
Middle Income
2025
2000
2010
2020E
2030E
Share of Urban Population
Affluent Class
Source: Company, Edel Invest Research
Lowest penetration of organized retail
India spends only 4% of total consumption on clothing
Food, Beverages, Tobacco
USA
85%
Taiwan
Clothing and Footwear
3%
81%
Malaysia
Gross Rent, Fuel & Power
14%
2%
55%
40%
Furniture & Appliances
Medical and Healthcare
Thailand
17%
40%
Transport & Communications
Indonesia
30%
China
6%
10%
20%
India
4%
Recreations
Education
4%
Miscellaneous Goods and
Services
8%
Source: Company, Edel Invest Research
Indian e-commerce industry to clock 40% CAGR
Apparel accounts for 31% of e-commerce spending
43.9
2%
11%
2%
Electronics
31.4
22.4
13.6
4.4
5.9
7.9
Apparel
7%
47%
16
Baby products
8.9
Personal Care
31%
2010
2011
Books
2012
2013
2014
2015
Others
2016E 2017E 2018E
Online retailing market India (USD bn)
Source: Company, Edel Invest Research
20
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Merger rationale for creation of ABFRL
AB Nuvo has decided to merge Madura with Pantaloons. Post the restructuring, Pantaloons will be renamed
Aditya Birla Fashion & Retail (ABFRL) and will be the biggest branded apparel company in India. The merger is
aimed at unlocking value for shareholders, as AB Nuvo is a holding company with interests in Telecom,
Financial Services and Textiles. The restructuring will also significantly simplify the structure by bringing the
entire fashion retail business under one entity. This will enhance clarity on capital allocation. Also, the
merger is likely to throw up some synergies on the procurement front and create economies of scale as it
can use the same supply chain channels, IT systems and vendor networks. The merger will also help Madura
shed its tag of being only a premium men’s wear brand, as Pantaloons has mostly mass and women-centric
brands.
Pre Transaction
Post Transaction
ABG
Public
ABG
ABNL
9.06%
58.3%
Public
51.1%
39.84%
41.7%
ABNL
1
PFRL/ABFRL
100%
MGLRCL
72.6%
2
27.4%
PFRL
Transaction Steps
Swap Ratio
1 Mirror Demerger of Madura Fashion division into PFRL
 26 equity shares of PFRL for every 5 equity shares of ABNL
2 Mirror Demerger of Madura Lifestyle division into PFRL
 7 equity shares of PFRL for every 500 equity shares of MGLRCL
The transaction is subject to corporate & regulatory approvals and is expected
to take further 3-4 months
 1 equity share of PFRL for all o/s preference shares of MGLRCL
Source: Company, Edel Invest Research.
21
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Outlook and valuations
Factoring base case assumptions, one may argue that current valuations limit huge upside in the near term,
but they also limit any downside. Over the long term, in our view, given the sheer quality and size of
Madura's 4 brands, presence in fastest growing segments such as fast fashion through Pantaloons & Forever
21, and an unparalleled distribution network, ABFRL is best poised amongst branded apparel players to take
advantage of the changing macroeconomic scenario. Improving financial metrics of robust free cash flow
generation, 39% EBITDA CAGR over FY16-18E and 20% RoCE jump by FY19E from 4% currently are expected
to sustain for many years, rendering ABFRL a potential multi-bagger.
We value Madura at 3x sales at par with peers like Kewal Kiran Clothing Ltd. (KKCL), who have identical
growth and return ratios. We value Pantaloons at 13x EV/EBITDA, akin to other retail players such as
Shopper’s Stop and Trent, as we expect a similar margin and RoCE profile.
SOTP Valuation
Valuations – Madura
Valuations - Pantaloons
Market Cap to Sales (FY18E)
Madura (FY18E Sales)
EV/EBITDA (FY18E)
INR 5,150 Cr
Market Cap to Sales
Pantaloons (FY18E EBITDA)
3.0x
Madura Market Cap
INR 204 Cr
EV/EBITDA
INR 15,450 Cr
13.0x
Pantaloons EV
INR 2,650 Cr
Less: Pantaloons Debt
INR 1,300 Cr
Pantaloons Market Cap
INR 1,350 Cr
Peers Comparison
Peers Comparison
Page
5.0x
Shopper Stop
13.0x
Indian Terrain
1.2x
Trent
11.0x
KKCL
3.8x
Expected ABFRL (Madura + Pantaloons) Market Cap - FY18E
INR 16,800 Cr
Current ABFRL Market Cap
INR 12,700 Cr
Potential Upside
32%
DCF analysis
In our DCF calculation, we have forecasted ABFRL’s business until FY26. We have assumed 24% EBIT CAGR, a
terminal growth rate of 5.5% and calculated a weighted average cost of capital of 10.5%. Based on our DCF
calculations and various assumptions, we have arrived at net present value (NPV) of Rs 212 per share.
Comparative Valuations – FY18E
Company Name
Arvind
CMP
EPS
P/E (x)
ROCE (%)
Market Cap (INR Cr)
313
25.7
12
18%
8,000
1,850
73.7
25
26%
2,250
Indian Terrain
155
10.5
14
21%
550
ABFRL
165
4.1
39
18%
KKCL
12,700
Source: Company, Edel Invest Research.
22
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Financial Analysis –
ABFRL
Poor consumer demand and competition from e-commerce resulted in a subdued 8% growth in FY16.
However, we believe growth will pick up from FY17 as the e-commerce threat is waning and demand is
picking up, as reflected in our End of Sale Season (EOSS) channel checks.
Revenue growth expected to improve from 8% in FY16 to 15-18% over the next few years
10000
9000
(INR Cr)
21%
9483
17%
8069
8000
7000
13%
6911
6060
9%
6000
5000
5%
FY16
FY17E
Revenue (INR Cr)
FY18E
FY19E
Revenue growth(%)
FY16 margin was depressed due to many one-offs—higher employee bonus expenses, merger consolidation
costs, weak demand, etc. The resultant 7% margin was a one off and we estimate a sharp jump in margin to
8.8% in FY17, 9.5% in FY18 and 10% from FY19 due to strong growth and high operating leverage nature of
the business.
One-offs and poor growth impacted EBITDA margins in FY16; Operating leverage to kick in from FY17
1000
11%
900
10%
(INR Cr)
800
10%
9%
9%
700
600
500
10%
8%
7%
7%
400
6%
300
200
5%
FY16
FY17E
EBITDA
FY18E
FY19E
EBITDA Margin(%)
Suppressed margins and renovation of Pantaloons, expensed as depreciation, led to a loss in FY16. However,
EBITDA margin improvement and reduction in depreciation & finance costs should result in robust
bottomline growth in the coming few years.
Operating and financial leverage to boost bottomline
600
5%
4%
(INR Cr)
4%
3%
400
6%
2%
200
0%
-2%
0
FY16
FY17E
FY18E
FY19E
-200
-2%
-4%
PAT (INR Cr)
PAT Margin (%)
Source: Company, Edel Invest Research.
23
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
ABFRL’s working capital cycle of ~20 days is the shortest in the industry. This is largely driven by extrmely
favorable terms from vendors (due to long standing relationships and strong brands) and short receivables
days (only Madura’s sales to LFS are receivables). As 50% of Madura’s and 100% of Pantaloons’
manufacturing is outsourced, asset turnover ratios are also high. Also, goodwill currently comprises 60% of
balance sheet. RoCE, post excluding goodwill, is close to 40%.
Best-in-class working capital cycle and high asset turnover—Goodwill denting return ratios
28%
25%
13%
21%
18%
17%
3%
FY16
FY17E
FY18E
FY19E
-16%
ROCE (%)
ROE (%)
As 60% of the manufacturing is outsourced and with further expansion of distribution network through the
franchisee route (franchisee model turning out to be successful for Pantaloons too), ABFRL is bound to
witness high free cash flows every year.
With completion of bulk of expansion phase, high FCF generation is on the cards
748
800
620
600
510
(INR Cr)
398
400
200
270
180
160
0
-200
FY16
-120
FY17E
Operating CF (INR Cr)
FY18E
FY19E
Free CF (INR Cr)
With strong FCF generation, we expect ABFRL to start delveraging from FY18E, leading to lower debt to
equity ratio.
Debt to Equity ratio to reduce gradually
2.5
2.0
2.0
1.7
1.2
(x)
1.5
0.8
1.0
0.5
0.0
FY16
FY17E
FY18E
FY19E
Source: Company, Edel Invest Research
24
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
ABFRL Key Management:
Name
Mr. Pranab
Barua
Mr. Ashish
Dikshit
Mr. Shital
Mehta
Mr. S
Visvanathan
25
Designation
Business Director, Apparel & Retail
40 years’ experience in the consumer and retail industry. He was the ex-CEO of
Trinethra Super Retail, acquired by the Aditya Birla Group in 2007. Mr. Barua has
previously worked in senior positions with Brooke Bond India, as Foods Director on
the Hindustan Unilever Board, as Chairman & Managing Director of Reckitt Benckiser
and as Regional Director, Reckitt Benckiser for South Asia. He holds a graduate degree
in B.A. (English Honours) from St. Stephens College, New Delhi.
Business Head, Madura
Joined Madura from Asian Paints in 1998 and has since headed its supply chain,
marketing and sourcing functions. Mr. Dikshit has also worked as Principal Executive
Assistant to the Chairman of ABG for more than 3 years. He is an Electronics &
Electrical Engineer from IIT-Madras and holds a Post graduate Diploma in
Management from IIM-Bangalore.
CEO, Pantaloons
Mr. Mehta has been with Aditya Birla Group for about 15 years. He was the ex-CEO of
International Brands & Retail, Madura, after working as the brand manager for Godrej
Foods (1996-2000). He is an MBA in marketing from SP Jain Institute of Management
& Research and has attended advanced management programs at Wharton Business
School.
CFO, Apparel & Retail
Mr. Visvanathan joined the Aditya Birla Group in 2007 in the Textile and Apparel
business and is also a member of the Management Committee of the Textile and
Apparel business of the Aditya Birla Group. He has 26 years of experience across
white goods, capital equipment, electrical equipment and auto components, having
previously worked with the Tata Group in various capacities in auto components
business, Voltas and Allwyn. He is a commerce graduate from Chennai University and
a qualified Chartered Accountant and Cost Accountant.
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Key Risks
•
Operational uncertainty over PFRL
The ABFRL management closed loss making Pantaloon stores and renovated exisiting ones. It is also in
the process of revamping vendor network, portfolio overhaul and launch of new stores. While negative
margins have improved to ~6%, it will be important to see if the margin can be scaled to 8%.
•
Increasing competitive intensity from other western brands
Many western brands as well as several domestic apparel players are currently present in India and new
brands such as GAP and H&M have also recently entered the country. This will keep the competitive
intensity high.
26

Semi-urban and urban slowdown
As target consumers are from Tier 1, 2 and 3 cities, any material economic slowdown in the these areas
could result in lower discretionary spending, which could impact ABRFL’s sales growth.

E-commerce threat
As e-commerce provides variety and convenience at cheaper prices, consumers have partially shied
away from premium apparel. However, ABFRL plans to counter this by providing variety and
convenience through its omni-channel network and provide consumers with an alternative source of
cheaper apparel through Pantaloon.

GST impact
A tax rate of 18% on branded apparel could lead to a higher tax outgo of 5-7% for most branded apparel
players as their current blended indirect tax rate is between 10% and 12%. However, this will be passed
on to customers, which may lead to a sentimentally minor negative impact on branded apparel players
in the short term.
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Annexure
Indian macro enviornment provides massive growth opportunity
Indian textile industry: An overview
The textile industry is one of the key sectors of the Indian economy as it accounts for 14% of total industrial
production, 13% of export earnings and 4% of GDP. It provides employment to over 4.5 crore directly and 6
crore indirectly, rendering it the second largest job creator after agriculture. India is the second largest
textile producer in the world, the largest producer of jute, second largest producer of raw cotton, cotton
yarn, cellulosic fibre/yarn & silk, and the fourth largest producer of synthetic fibre. Also, its handloom
capacity is the highest in the world (63% of global pie). It is present across the entire textile value chain
(spinning, weaving, readymade garments and home textiles). The total market size of the Indian textile
industry currently stands at USD 108 bn.
Indian textile industry break-up
Indian Textile Industry
USD 108 bn
Domestic
USD 81 bn
Yarn/MMF
USD 20 bn
Fabric
USD 34 bn
Exports
USD 27 bn
RMG/ Apparel
USD 27 bn
Yarn/ MMF
USD 6 bn
Fabric
USD 3 bn
RMG/ Apparel
USD 18 bn
Source: CRISIL, Edel Invest Research
In spite of the size and global positioning, enterprises making up the Indian textile industry are minuscule
and fragmented. While the larger, de-centralised and unorganised sector is present in handloom,
handicrafts, sericulture, power looms, the organised sector is into capital-intensive spinning, apparel and
garmenting segments. But, the outlook for the textile sector is promising. Domestic consumption is expected
to be driven by Indian readymade garments (RMG) and branded garments as they are gaining prominence in
tier 2 and 3 cities due to rising incomes and growing aspirations for good quality and trendy fashion wear.
Going ahead, improvement in Europe’s economy, Latin America’s progress and easing of geopolitical
tensions in the Middle East are set to boost India’s exports.
Domestic textile consumption and textile exports are expected to clock ~10% CAGR each over the next 5
years. India’s share in the global textile market is set to rise from 5% in 2015 to 8.0% in 2020. China is
expected to vacate ~USD 100 bn of textile space over the next 5-6 years due to rising labour costs,
appreciating currency, high energy costs and renewed focus on the domestic market. Countries like India,
Vietnam, Bangladesh and Sri Lanka are likely to be key beneficiaries. While the total Indian textile exports
are estimated to touch USD 60 bn over the next 5 years, the textile market will grow to USD 221 bn by 2021
from USD 108 bn. This growth will be driven by readymade garments, within which branded apparel
segment is expected to grow at 10-12% annually and touch ~USD 65 bn by FY18E.
27
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Readymade Garments (RMG)
The total size of the Indian RMG segment currently is USD 45 bn; of this, while domestic market is estimated
at USD 27 bn, exports stand at USD 18 bn. In CY14, the RMG segment clocked robust growth on account of
orders shifting to India from Bangladesh due to labour safety concerns. Also, demand from major importing
countries saw an uptick, boosting exports by 19% in CY14.
RMG segment break-up
RMG
USD 45 bn
Domestic
USD 27 bn
Men
USD 13 bn
Women
USD 11 bn
Exports
USD 18 bn
Kids
USD 2 bn
US
USD 4 bn
EU
USD 6 bn
Others
USD 8 bn
Source: CRISIL, Edel Invest Research.
In CY15, domestic volumes are expected to rise 6.5% versus 6.0% growth in CY14, but realisations are
expected to remain flat as apparel manufactures will pass on the decline in raw material costs to consumers.
This will lead to slower growth of 5.5% versus 7.0% in CY14. Exports are also expected to slacken in CY15
with 6-8% volume growth versus 14% in CY14 due to sluggish demand from Europe and the US, strong INR
and shifting back of orders to Bangladesh & Vietnam.
RMG: Long-term outlook
The long-term trend for the RMG segment looks promising. The domestic RMG segment is expected to post
robust growth over the next 5 years, primarily driven by volume growth and an improvement in realizations.
Favourable demographics, rising incomes and greater penetration in tier 2 & 3 cities will drive volumes.
Lower raw material costs (cotton and manmade fibres) and improved demand will boost margins. Exports
are expected to remain subdued at 6% CAGR due to the same reasons as CY15. However, exports can
improve going forward amidst a weaker INR, increase in imports from the US, shifting of orders from
Bangladesh and growth in non-traditional markets such as Australia, Japan and UAE (Others) that will
account for more than half of total exports, up from 21% in CY09.
28
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Branded apparel/RMG: Most profitable in textile value chain
Although the RMG segment’s growth is expected to moderate compared to the high growth clocked in 2014,
surge in the branded apparel market is expected to prevail. Sales of branded apparels have increased at 15%
CAGR over 2009-14. The branded apparel segment is expected to post 10-12% CAGR over 2014-19 in spite of
a slower growth anticipated in the RMG segment. This spurt is expected to be driven by volumes as well as
better realizations. Therefore, the share of branded garments is expected to rise to 46-48% in 2019
compared to ~35% in 2014.
RMG is the most lucrative model for any textile company due to low bargaining power of other stakeholders
in the value chain, high entry barriers and minimal threat of substitutes due to strong brand recall. The
threat of new entrants is real, as many international brands are entering India to cash in on the vast
untapped potential. RMG business with strong brands, high growth and asset light models command the
best margins and have the highest RoCEs in the textile value chain. Hence, branded apparels is the most
profitable segment.
Branded Apparel/RMG – Most profitable
Yarn
Fabric
RMG
Home Textiles
Bargaining power of buyers
High
Medium
Low
High
Rivalry amongst existing players
High
High
Low
High
Threat of new entrants
High
Medium
Medium
High
Bargaining power of sellers
Low
Medium
Low
Medium
Threat of substitutes
High
Medium
Low
High
Entry barriers
Low
Medium
High
Low
Financial Ratios
Yarn
Fabric
RMG
Home Textiles
Asset Turnover
0.8 - 1.8 x
1.0 - 2.4 x
1.2 - 2.8 x
1.2 - 2.2 x
EBIT Margins
9 - 20%
8 - 23%
8 - 25%
8 - 20%
ROCEs
7 - 22%
11 - 32%
11 - 60%
10 - 45%
Source: Company, Edel Invest Research.
Growth in the coming 5 years is more likely to be driven by urban consumption of branded apparel, spurred
by economic resurgence, growing urbanisation, higher discretionary spending, digital push and rise in
penetration of organised retail. Organised retail is estimated to post 18% CAGR, as brands expand reach to
tier 2 and 3 cities through exclusive and multi-brand retail outlets. Branded players in urban areas earn
higher per unit realisations, as they have the power to command double the rate of semi-urban areas given
their superior quality, latest trends and established brand equity. Therefore, branded players in the
organised retail segment have the highest margins and highest profitability.
29
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Financial Statements
Financial Statements
Year to March (INR Cr)
Net revenue
Ma teri a l s cos ts
Gros s profi t
Empl oyee cos ts
Other cos ts
EBITDA
Depreci a tion & Amortiza tion
EBIT
Other i ncome
EBIT i ncl . other i ncome
Interes t expens es
Profi t before tax
Provi s i on for tax
Adjus ted Profi t
Ba s i c s ha res outs tandi ng (Cr)
EPS (INR)
Di vi dend per s ha re (INR)
Di vi dend pa yout (%)
Common size metrics ‐ as % of net revenues
Year to March
COGS
Empl oyee Exp
Other Exp
Depreci a tion
EBITDA ma rgi ns
EBIT ma rgi ns
Adj profi t ma rgi ns
Net profi t ma rgi ns
Growth ratios (%)
Year to March
Revenues
EBITDA
PBT
Adj profi t
Net profi t
FY14
1,661
953
709
150
403
46
109
-63
5
-57
129
-187
0
-187
46.4
-4.1
0.0
0%
FY15
1,851
1,000
850
184
463
87
183
-96
3
-93
134
-228
0
-228
46.4
-4.9
0.0
0%
FY16
6,060
2,755
3,305
597
1,663
397
338
59
12
71
175
-104
0
-104
76.9
-1.4
0.0
0%
FY17E
6,911
3,110
3,801
622
1,866
608
206
402
12
414
190
224
45
179
77.2
2.3
0.0
0%
FY18E
8,069
3,591
4,478
726
2,179
767
200
566
12
578
180
398
80
319
77.2
4.1
0.0
0%
FY14
57.3%
9.0%
24.2%
6.6%
2.8%
-3.8%
-11.4%
-11.2%
FY15
54.1%
9.9%
25.0%
9.9%
4.7%
-5.2%
-12.3%
-12.3%
FY16
45.5%
9.9%
27.4%
5.6%
6.6%
1.0%
-1.7%
-1.7%
FY17E
45.0%
9.0%
27.0%
3.0%
8.8%
5.8%
2.6%
2.6%
FY18E
44.5%
9.0%
27.0%
2.5%
9.5%
7.0%
4.0%
4.0%
FY14
29.3%
NA
NA
NA
NA
FY15
11.4%
NA
NA
NA
NA
FY16
NA
NA
NA
NA
NA
FY17E
14.0%
53.2%
NA
NA
NA
FY18E
16.8%
26.0%
77.8%
77.8%
77.8%
*Numbers up to FY15 are standalone Pantaloons numbers. Numbers post FY16 are Madura + Pantaloons
**As there is no Annual Report of ABFRL, all the numbers are based on proforma Financial Statements
30
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Balance sheet
As on 31st March
Equi ty ca pi ta l
Res erves & s urpl us
FY14
93
486
FY15
93
252
FY16
769
174
FY17E
772
350
INR Cr
FY18E
772
669
Borrowi ngs
1,051
1,311
1,858
1,900
1,800
Other l ong-term l i a bi l i ti es
Sources of funds
48
1,678
61
1,717
100
2,902
100
3,122
100
3,341
Gros s Bl ock
794
909
1,698
2,048
2,398
(350)
25
(516)
4
(1,126)
-
(1,332)
-
(1,532)
-
469
396
572
716
866
1,189
6
1,187
-
1,775
272
1,775
272
1,775
272
358
427
1,388
1,555
1,795
Sundry debtors
Ca s h a nd equi va l ents
17
11
3
7
391
20
417
44
486
46
Loa ns a nd a dva nces
26
36
200
200
200
412
465
474
406
1,999
1,437
2,216
1,576
2,528
1,820
Accumul a ted Depreci a ti on
CWIP
Net Fi xed As s ets
Net i nta ngi bl e a s s ets
Inves tments
Inventori es
Tota l current a s s ets
Sundry credi tors a nd others
Provi s i ons
Tota l current l i a bi l i ti es & provi s i ons
Net current a s s ets
10
16
280
280
280
475
(63)
422
52
1,717
283
1,856
359
2,100
428
-
-
-
-
-
77
1,678
82
1,717
2,902
3,122
3,341
Deferred ta x a s s ets
Other l ong-term a s s ets
Uses of funds
Book va l ue per s ha re (INR)
12.5
7.4
12.3
14.5
18.7
Free cash flow
Year to March
Net profi t
Add : Depreci a ti on
Others
FY14
FY15
FY16
FY17E
FY18E
-186.8
109.0
-227.6
183.5
-103.9
338.0
179.3
206.0
318.8
200.1
107.2
117.8
163.0
178.0
168.0
Gros s ca s h fl ow
Cha nges i n WC
29.4
40.8
73.7
-109.6
397.1
-217.3
563.3
-52.9
686.9
-66.5
Opera ti ng ca s h fl ow
70.1
-36.0
179.8
510.4
620.3
-117.5
-47.3
-116.3
-152.3
-300.0
-120.3
-350.0
160.4
-350.0
270.3
Ca pex
Free ca s h fl ow
Cash flow metrics
Year to March
FY14
FY15
FY16
FY17E
FY18E
Ca s h fl ow from opera ti ons
70.1
-36.0
179.8
510.4
620.3
Ca s h Fl ow from i nves ti ng a cti vi ti es
Ca s h Fl ow from fi na nci ng a cti vi ti es
681.3
-765.9
-108.8
141.1
-185.4
299.4
-338.0
-148.7
-338.0
-280.0
Ca pex
-117.5
-116.3
-785.4
-350.0
-350.0
-
-
-
-
-
Di vi dends
*Numbers up to FY15 are standalone Pantaloons numbers. Numbers post FY16 are Madura + Pantaloons
**As there is no Annual Report of ABFRL, all the numbers are based on proforma Financial Statements
31
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Profitability & efficiency ratios
Year to March
ROAE (%)
ROACE (%)
ROIC (%)
Inventory da y
Debtors da ys
Pa ya bl e da ys
Ca s h convers i on cycl e (da ys )
Current ra tio
Debt/Equi ty
Core ROACE (%)
Operating ratios
Year to March
Total a s s et turnover
Fi xed a s s et turnover
Equi ty turnover
Du pont analysis
Year to March
NP ma rgi n (%)
Total a s s ets turnover
Levera ge mul tipl i er
ROAE (%)
Valuation parameters
Year to March
Di l uted EPS (INR)
Y‐o‐Y growth (%)
Di l uted PE (x)
Pri ce/BV (x)
EV/Sa l es (x)
EV/EBITDA (x)
Di vi dend yi el d (%)
FY14
NA
NA
NA
79
4
102
-16
0.8
1.8
FY15
NA
NA
NA
84
1
80
9
1.1
3.8
FY16
NA
3%
3%
84
24
87
16
1.2
2.0
FY17E
17%
13%
12%
82
22
83
17
1.2
1.7
FY18E
25%
18%
16%
81
22
82
17
1.2
1.2
NA
NA
7%
33%
40%
FY14
0.8
2.2
6.6
FY15
1.1
2.2
4.0
FY16
2.6
4.6
9.4
FY17E
2.3
3.7
6.7
FY18E
2.5
3.6
6.3
FY14
-11.4%
0.8
6.7
NA
FY15
-12.3%
1.1
3.7
NA
FY16
-1.7%
2.6
3.6
NA
FY17E
2.6%
2.3
2.9
17.4%
FY18E
4.0%
2.5
2.5
24.9%
FY14
-4.1
NA
NA
13.2
5.4
193.2
0.0
FY15
-4.9
NA
NA
22.2
4.8
102.5
0.0
FY16
-1.4
NA
NA
13.5
2.4
36.6
0.0
FY17E
2.3
NA
71.0
11.4
2.1
23.9
0.0
FY18E
4.1
77.8
40.0
8.8
1.8
19.0
0.0
*Numbers up to FY15 are standalone Pantaloons numbers. Numbers post FY16 are Madura + Pantaloons
**As there is no Annual Report of ABFRL, all the numbers are based on proforma Financial Statements
32
Edel Invest Research
Aditya Birla Fashion & Retail Ltd
Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200
Vinay Khattar
Head Research
[email protected]
Rating
Expected to
Buy
appreciate more than 25% over a 12-month period
Hold
appreciate up to 10% over a 12-month period
Reduce
depreciate more than 10% over a 12-month period
ABFRL Price Chart
300
250
200
150
100
50
33
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0
Edel Invest Research
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Edel Invest Research